The impact of foreign investment on residential values

The Department of Treasury’s released a working paper on December 2nd analysing perceived links between foreign investment and residential property price growth.

It concluded that there is no tangible evidence to support the assumption that increased foreign demand is a significant contributor to the majority of recent residential price growth.

The following is an extract of the publication and its insights are most interesting

“Across Sydney and Melbourne, the models which we consider to be the best specified indicate that foreign demand typically increased prices by between $80 and $122 on average in each quarter. This is based on the average postcode in these two cities receiving around 0.6 more foreign investment approvals each quarter through time. It is important to note that this is very small when compared with the average quarterly increase in Sydney and Melbourne property prices over the period studied of around $12,800… for a range of models, the increase in median property prices in a postcode that occurs if the number of foreign investment approvals in a period increases by one more than usual. This represents the impact of an additional foreign investment approval at the margin, as opposed to the effect of the average foreign investment approval. But once again, it is important to realise that the price increases indicated… are small when compared to the average quarterly increase in property prices over the period of the study, which range from around $3,800 for Australia overall to around $12,800 for postcodes in Sydney and Melbourne. Note that these figures relate to foreign investment approvals at the margin. As such, multiplying these dollar figures by the total number of foreign investment approvals received in a postcode would be nonsensical and would not give the overall dollar impact of foreign demand on property prices. While this particular study focuses on a measure of foreign demand, there isn’t any inherent reason why an increase in demand for one additional property from a foreign investor should be considered as any different in its impact on prices from an increase in some forms of new domestic demand, for example a first home buyer moving out of the family home to purchase a property for the first time.”

The report concludes with the following:

“Foreign investment has contributed to Australia’s sustained economic growth. Recently, foreign investors have accounted for an increasing share of demand for Australian residential real estate. This paper estimates that only a small proportion of the strong property price growth over the study period can be attributed to foreign demand. It is also the case that the majority of foreign investment approvals are for new dwellings, consistent with Australia’s foreign investment policy for residential real estate which, in part, aims to increase the total supply of dwellings.”

Property price data used in this publication were sourced from ‘CoreLogic’.

The question I pose is: “What does it all mean?”

This is my take on the matter

It is becoming more blatantly obvious that the policies of this country, like many others, are determined by media hype and popularist views. Government decisions are made on the principle that if the public wants something, it gets it and that way governments retain power. When the media mounted its hobby horse last year pandering to a somewhat partly xenophobic audience, the Federal Government (namely Joe Hockey) decided to give teeth to the Foreign Investment Review Board. The media ‘beat up’ resulted in the introduction of new rules and regulations relating to non-resident property acquisition. The feeble excuse given to justify these rules was the need to cool Australia’s property market and give the Aussie battler a go. Perhaps as a bonus, to avoid our country being sold to overseas interests.

Next thing we get are media headlines telling us how a trophy Sydney property had been unlawfully acquired and that the billionaire Chinese purchaser was forced to “on sell”. Now everyone’s taste for blood was appeased. However, what did that achieve?

First, it cooled foreign investment in a sector of the market which rarely affects the average Australian resident that of the ‘off the plan’ apartments market. Why would the Government object to more concrete being exported to foreign investors? It is probably one of our best sustainable exports. The construction industry employs hundreds of thousands, if not millions of Australians, directly or indirectly and developer profits are taxed locally. The Government gets its GST, the state governments get their stamp duty, local governments get greater revenue for more municipal council rates and tenants get more affordable accommodation with greater choice as supply grows. Almost everyone benefits.

What is the downside of this strategy? The only real negative is that capital growth in this sector is temporarily stalled. But not forever as eventually inflation will take hold again and values will rise.

The working paper clearly indicates that foreign investment is having little or no effect on property values. In fact foreign investment contributes a mere $80-$120 per month to the average property monthly growth of up to $12,800. Less than 1%. Values are being driven by a multitude of factors, almost none of which are related to foreign investment. So what was the motive of the Government’s initiative in taxing and regulating foreign investment?

A money grab.

A new application fee for FIRB approval, ranging from $5,000 to $10,000 was just one revenue source. Next, state governments decided to raise the stamp duty levy by as much as an additional 7% of the purchase price. The taxes for a non-resident purchasing a residential property in Victoria, for example can be as high as $150,000 (or more) for a million dollar property. Our State Government is rolling in it. Until it stops. That’s how they are able to squander $1 billion of your money (or that of the non-residents) on the cancellation of the East West link. Have their actions helped kill the goose that lays the golden egg?

So what’s the motivation for the Federal Government? Well in my view, it has nothing to do with the property bubble. APRA and the RBA are looking after that issue.

Has anyone noticed the decision that deems every vendor whose property achieves a sale price exceeding $2 million, to be a non-resident unless they secure a clearance from the ATO? What a light bulb moment! I wonder who the genius that created that idea. I’m sure he was paid a big fat bonus. So here we have the plot revealed. If you have an overdue debt to the ATO, whammy. Instant debt recovery.

Public xenophobia has been harnessed allowing the state governments to increase revenue from stamp duty on foreign purchases and the Federal Government to collect outstanding taxes. Short term, this is a great idea. More taxes helping balance the budget.

Long term this strategy is likely to fail. Non-residents will buy less property, stamp duty revenue will fall, savvy tax cheats will refrain from selling their multimillion dollar properties, or find a way of splitting their assets prior to a sale to avoid the need for ATO clearance and population growth and low interest rates will ensure that property prices will continue to rise relentlessly with or without foreign investment. And when ultimately the construction industry stumbles and falters as in this case it likely will, then the consequences will be dire. If the leaders of this country want a recession driven by unemployment and declining revenues, then that’s what they will get. And the media will get its next scaremongering headlines.

The following is the link to the full publication